I've been a great admirer of yours for many years, and, like anybody remotely connected with investing, hold your opinions in the highest regard.

How can anybody argue with your track record -- the growth in
Berkshire
's book value has outpaced the growth in the Standard & Poor's 500 in all but four of the last 38 years -- or with your personal fortune, estimated to be over $30 billion?

But I must take issue with some comments you made to shareholders in your latest annual report.

&ldquo;We continue to do little in equities,&rdquo; you wrote (referring, of course, to you and your longtime associate, Berkshire vice-chairman Charlie Munger).

&ldquo;Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us.&rdquo;

You attributed that to &ldquo;the insanity of valuations reached during The Great Bubble [whose] hangover may prove to be proportional to the binge.&rdquo;

To which I respond, with all due respect: This time, Warren, you're wrong.

Not about the numbers, of course. You're almost never wrong about them.

Valuations still look high by historical standards. The S&P 500 trades at nearly 30x trailing-12-month earnings, according to research analyst Sam Burns at Ned Davis Research in Venice, Florida.

Back in 1974, the end of that bear market, the S&P 500 changed hands at a mere seven or eight times trailing earnings. The average for the past 50 years: 17x.

If earnings grow by their normal 7% annual clip, Burns estimates it would take a decade for the S&P's P/E to work its way down to more normal levels.

And mutual funds, Burns points out, hold less than 4% of their assets in cash, vs. 13% in the 1990 bear market. That theoretically would provide little kindling wood for any future rally.

But that's not the whole story, by a long shot.

First of all, those multiples reflect cyclically depressed earnings and an inflation rate far lower than it was in the bad old days of the 1970s. So, we need to discount future cash flows at a much lower rate than we did back then, which would allow somewhat higher P/Es.

But most importantly, other signs suggest that sentiment is as bad as bad can be -- or at least it was, before Thursday's big rally. You need look no further than the recent buying panic in the bond market, despite profit taking on Thursday.

Savers and investors, terrified as war with Iraq draws nearer and desperate for any return higher than money market funds' infinitesimal yields, have thrown money at Treasurys in recent weeks, driving rates on the ten-year note down to lows not seen since I Love Lucy ruled the tube.

Fixed-income funds took in $12.5 billion in new money in January, while equity funds had net redemptions of $466 million, following outflows of $8.3 billion in December, according to the Investment Company Institute. February's stats may be even more dramatic.

Want some more numbers?

In February, the Index of Investor Optimism, a poll of 1,000 U.S. investors conducted by UBS AG and the Gallup Organization, fell to an all-time low amid fears about war and the economy.

Market Vane's Bullish Consensus has drifted lower and lower, too, hitting 23% in the last couple of weeks.

And retail online brokers' market share fell to 15% in last year's fourth quarter, from a peak of 45% at the height of the bubble.

Just one more number: Alan Skranka of Edward Jones told Nightly Business Report this week that the $2.3 trillion investors have socked away in money market funds represents 28% of the value of all stocks, a 20-year high. Kindling wood, anyone?

And then there's the anecdotal evidence, like the recent Charles Schwab television commercial showing a harried investor fleeing a postman delivering his brokerage statement.

Or Wall Street Journal columnist Jonathan Clements' description of readers' reaction to his recent defense of holding stocks: a lone message of support from &ldquo;one brave soul&rdquo; amid a &ldquo;blizzard of naysaying e-mails.&rdquo; (Click here for column.)

And do you remember the last time anyone talked about his or her portfolio at a dinner party? Chances are, Bill Clinton was still holding court at 1600 Pennsylvania Avenue.

Some say we haven't seen real capitulation yet. But no bear has ever given me a clear picture of what that would look like.

Do we really expect people to run out in the middle of Fifth Avenue or Wilshire Boulevard and scream, &ldquo; I give up! I'm dumping my stocks and will never buy again&rdquo;?

The point is, individual investors have capitulated -- capitulated into indifference. They may not be jumping out of windows, but they've jumped out of the market, with both feet. And it will be a long time before they get back in, Thursday's rally notwithstanding.

As war looms, and with it the threat of terrorism and fears about a new recession, the wall of worry looks as high as Malaysia's Petronas Towers.

That's why I conclude, Mr. Buffett, that -- assuming a U.S. victory in Iraq in a reasonable time and no catastrophic acts of terror on American soil -- the economy will continue its long, slow recovery and stocks will gradually work their way higher.

&ldquo;Occasionally successful investing requires inactivity,&rdquo; you wrote to shareholders.

And occasionally it requires activity. As fear rules the markets and stocks test their lows, long-term investors -- like you -- may be looking at their first great buying opportunity in years.

Sincerely,

Howard R. Gold

OFF THE CUFF With this column, I begin a series of informal observations about matters large and small.

Rummy's Rant: So, Secretary of Defense Donald Rumsfeld has now shrugged off the possible defection of Great Britain, our staunchest ally to date in the war against Iraq. (He later recanted.) Whether you support or oppose the war, it's clear Rumsfeld has become the Andy Rooney of the Bush Administration. Why don't you just zip it for a while, Rummy, and let Colin Powell handle the diplomacy?

March Mess: Am I the only one who finds March Madness, the NCAA men's basketball tournament, a confusing mess in which teams you never heard of always seem to upset the schools you really want to see play? And don't even mention those ridiculous office pools, more complex than any computer manual, in which the person who knows the least about basketball always wins.

Less Razzle Dazzle: Chicago should clean up at the Oscars this year, but I'm still amazed at the popularity of what must be the most cynical musical ever filmed. Still, if you like the great Kander-Ebb score and want something a bit less glitzy than the movie soundtrack, you might try the original cast album from Bob Fosse's landmark 1975 Broadway staging. True, Gwen Verdon (Fosse's wife) is a rather shopworn Roxie, but the legendary Chita Rivera is a fine Velma Kelly (the Catherine Zeta-Jones role in the movie). And sleazy lawyer Billy Flynn is played impeccably by Jerry Orbach -- yes, the same hardboiled detective Lennie Briscoe from Law and Order, but a suave song-and-dance man in his time. Arista's 20-bit digital remastering also sounds fine.

Robust Reds: If you've had your fill of California Cabs and have sworn off Bordeaux, you might want to try a 1997 Brunello di Montalcino instead. My wife and I splurged for a bottle of this bold, rich Tuscan Sangiovese on Valentine's Day, and it lived up to all the hype about that monumental vintage. Brunello's not cheap, and it's not for the squeamish: Salmon or poultry just won't stand up to it; although bistecca alla fiorentina (or any other steak) will. Open the bottle a half-hour before drinking, or better yet, decant it. We had a Mastrojanni, but some widely available 1997s include Barbi and Banfi. Cent'anni!

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